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Posts Tagged ‘Cantillon Effect’

The Inflationary Attack on America’s Poor

Posted by M. C. on March 4, 2022

by Thomas Eddlem

united states federal reserve system symbol.

The ramp-up of money-printing by the Federal Reserve Bank since the COVID pandemic began has meant, like clockwork, an increase in CPI price inflation exceeding a seven percent annual rate. Though price inflation as measured by the CPI was temporarily delayed by the crosswinds of the shutdown-induced recession, the Fed inflation of the currency had already enriched the financial sector and created a wider income divide between the top one percent and the rest of the people. And this has not gone unnoticed by the political left, even if they remain ignorant of the real economic causes.

Economist and financier Richard Cantillon explained the impact of inflation upon the poor in his posthumous Essai nearly four centuries ago, in what has become called the “Cantillon Effect.” Cantillon posited that “the abundance of money makes everything more expensive” and that the persons who create the money benefit from its first use, while those who are further down the circulation river are robbed of the value of the money they do possess:

If the increase of hard money comes from gold and silver mines within the state, the owner of these mines, the entrepreneurs, the smelters, refiners, and all the other workers will increase their expenses in proportion to their profits.

Today, the miners and smelters are the financial sector, followed by the real estate sector, which Cantillon noted was a refuge from the ravages of inflation, observing that “an abundance of money naturally increases consumption and contributes above everything else to a higher valuation of the land.”

What that means from a practical point-of-view is that the poorer a man is, the more inflation hurts him. Inflation always takes from the creditor and gives to the debtor by devaluing dollar-denominated assets.

But how, you many ask, can a poor man be a creditor and a rich man be a debtor? One first needs credit in order to qualify for debt, and the poorer a man is, the less he is able to become a debtor. The working poor are always forced by the social construct to be a creditor:

  1. Inflation always takes from the wage-earner and gives to the employer, to whom he has credited his labor while he awaits payday.
  2. Inflation always takes from the renter and gives to the landlord, to whom he has advanced his rent and security deposit. But inflation protects the landowner by increasing the valuation of his land and comparatively diminishing the payments for his mortgage.
  3. Inflation always takes from the wage-earner who deposits his wages and gives to the banker, whose very business is one of managing debt.
  4. Inflation takes from the pensioner on a fixed income and gives to the financial sector.

Collectively, this is a huge transfer of wealth: an inflation tax on every single worker, collected from several weeks wages, a couple of months rent, all the bank deposits of the poor—levied also upon the value of fixed-income retirees—is transferred to those “miners and refiners” in the financial industry. Inflation is a direct redistribution of wealth from the working poor to the financial sector, which explains the extraordinary enrichment of the financial sector in the US since the end of the gold standard and rise of the age of inflation in the 1970s.

The rich man’s assets may include some cash and non-inflation-indexed bonds, but the overwhelming majority of the rich people’s assets are denominated in real estate, stocks and other assets that are relatively safe from inflation. And most of them benefit from inflation indirectly by being further up the inflation pipeline.

The middle class may have a home where the value of the mortgage payment is decreased by inflation (though this is never more than 29% of his income by industry rule) and may see a proportionate increase in the valuation of his home. But the other 71%-plus of his income is robbed regularly from inflation, so the middle class too becomes poorer overall.

The poor man is especially attacked by inflation. The poor man pays the inflation tax on 100% of his assets (which, however small they may be, are inevitably cash-denominated), 100% of his income, and everything he expects to receive as income, including the labor of his own hands.

Even before the CPI recorded price inflation, the increase in income disparity was already widened. Establishment politicians and their crony house economists will reliably deploy deflation as their tired, old bogey-man, inevitably bringing up irrelevant references to the Great Depression as a counter to this point. But deflation actually makes necessary goods more affordable to poor people during tough economic times at the expense of depreciation of the assets of the rich. The currency inflation created by the Fed actually cheated the poor out of this meager and needed benefit.

Inflation is the most regressive tax, and the most cruel. This is why there is so often starvation in nations with hyper-inflation; inflation preys on the most vulnerable in society, and the greater the inflation, the greater the harm inflicted upon the poor. It’s clearly long past time—for the sake of the poor—to abolish the Fed and restore a stable, commodity-based currency.

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Is Price Stability Really a Good Thing? | Mises Wire

Posted by M. C. on November 19, 2021

Contrary to popular thinking, there is no such thing as a price level that should be stabilized by the central bank in order to promote economic prosperity. Conceptually, the price level cannot be ascertained, notwithstanding the sophisticated mathematics. Obviously if we do not know what something is, it stands to reason that we cannot keep it stable. Policies aimed at stabilizing an unknown price level only stifle the efficient use of scarce resources and lead to economic impoverishment.

Frank Shostak

One of the mandates of the Federal Reserve System is to attain price stability. It is held that price stability is the key as far as economic stability is concerned. What is it all about?

The idea of price stability originates from the view that volatile changes in the price level prevent individuals from seeing market signals as conveyed by changes in the relative prices of goods and services.

For instance, because of an increase in the demand for apples, the prices of apples increase relatively to the prices of potatoes. This relative price increase gives an impetus to businesses to increase the production of apples relative to potatoes.

By being able to observe and respond to market signals as conveyed by changes in relative prices, businesses are said to be able to stay in tune with market wishes and therefore promote an efficient allocation of resources.

It is held that as long as the rate of increase in the price level is stable and predictable, individuals can identify changes in relative prices and thus maintain the efficient allocation of resources. However, when the rate of increase is unexpected, i.e., of a sudden nature, it tends to obscure the relative price changes of goods and services. This in turn makes it much harder for individuals to ascertain the true market signals. Consequently, this leads to the misallocation of resources and to a loss of real wealth.

Note that in this way of thinking changes in the price level are not related to changes in relative prices. Unstable changes in the price level only obscure but do not affect the relative changes in the prices of goods and services.

So if somehow one could prevent the price level from obscuring market signals, obviously this will lay the foundation for economic prosperity. Consequently, a policy that can stabilize the price level will enable businesses to observe the relative price changes. This in turn will allow businesses to abide by consumers’ wishes.

The Root of Price Stabilization Policies: Money Neutrality

At the root of price stabilization policies is a view that money is neutral—that changes in money only have an effect on the price level while having no effect whatsoever on the real economy.

For instance, if one apple exchanges for two potatoes, then the price of an apple is two potatoes and the price of one potato is half an apple. Now, if one apple exchanges for one dollar, then it follows that the price of a potato is fifty cents. The introduction of money does not alter the fact that the relative price of potatoes versus apples is two to one. Thus, a seller of an apple will get one dollar for it, which in turn will enable him to purchase two potatoes.

Under the framework of monetary neutrality an increase in the quantity of money leads to a proportionate fall in its purchasing power, i.e., a rise in the price level, while a fall in the quantity of money will result in a proportionate increase in the purchasing power of money, i.e., a fall in the price level. None of this will alter the fact that one apple will be exchanged for two potatoes, all other things being equal.

Now, following this logic, if the amount of money has doubled, the purchasing power of money is going to halve, i.e., the price level is going to double. This means that now one apple can be exchanged for two dollars and one potato for one dollar. Despite the doubling in prices, a seller of an apple can still purchase two potatoes with the two dollars obtained.

We have here a total separation between changes in the relative prices of goods (how many apples exchange per potato) and the changes in the price level. Why is this way of thinking problematic?

How New Money Enters the Economy: The Cantillon Effect

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How The Nation’s Central Bank Is Covertly ‘Nudging’ Americans To Accept Digital Money & The Great Reset – LewRockwell

Posted by M. C. on April 2, 2021

By Bill Sardi

Ever heard of the Cantillon Effect?  Neither had I.

It is what is happening right now in America, and it reveals that the primary objective of the nation’s exclusive distributor of money, the Federal Reserve Bank, is to boost the value of wealthy people’s incomes at the expense of the poor, which is why the rich get richer and the poor get poorer in America today.

First, a reader needs some backgrounding before wading through all the financial gibberish found online.

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Why Mises Opposed a Global Government for Managing Trade | Mises Wire

Posted by M. C. on August 13, 2019

The dangerous fact is that while government is hampered in endeavors to make a commodity cheaper by intervention, it certainly has the power to make it more expensive. Governments have the power to create monopolies; they can force the consumers to pay monopoly prices; and they use this power lavishly. Nothing more disastrous could happen in the field of international economic relations than the realization of such plans. It would divide the nations into two groups — the exploiting and the exploited; those restricting output and charging monopoly prices, and those forced to pay monopoly prices. It would engender insoluble conflicts of interests and inevitably result in new wars.

A recent episode of the Human Action Podcast dealt with Mises’ Omnipotent Government, written between 1939 and 1943 and first published in 1944.

Besides its treatment of German national socialism, Mises’ Omnipotent Government also contains an analysis of the various suggestions for “world government” toward the end of the second World War. This article is a short commentary on Mises’ analysis of proposed international economic frameworks, their shortcomings and their subsequent outcomes.1

A Type of World Government

After maintaining the distinction that he makes earlier in Omnipotent Government between the terms “socialism” and “interventionism,” Mises correctly foresees what later became the most important post-war technique of international economic planning. Namely, international agreements between sovereign states:

The more realistic suggestions for world planning do not imply the establishment of a world state with a world parliament. They propose international agreements and regulations concerning production, foreign trade, currency and credit, and finally foreign loans and investments.

After the second World War, these international agreements took the form of “three pillars”:

  • the Final Act of the Bretton Woods Conference, entering into force in 1945, which gave birth to the World Bank and the International Monetary Fund;
  • the General Agreement on Tariffs and Trade (later becoming the WTO Agreements) of 1947;
  • the Havana Charter for the International Trade Organization of 1948, which failed to enter into force after the United States refused to ratify it.

After the failure of the Havana Charter, the issue of international investment protection was the subject of several thousands of state-to-state bilateral and multilateral investment treaties (BITs and MITs), which specify the substantive rights of foreign investors and applicable dispute resolution mechanisms. A good example of such a treaty is Chapter 11, titled ‘Investment’ of NAFTA, which may be soon replaced by Chapter 14 of the USMCA.

Other important international agreements include the OECD Codes of Liberalisation of Capital Movements and of Current Invisible Operations and other, “soft,” law such as the World Bank’s Guidelines on the Treatment of Foreign Direct Investment and the FATF Recommendations on Combating Money Laundering and the Financing of Terrorism and Proliferation.

International Government Planning is Government Planning all the Same

Regardless of its form, Mises points out that the concept of planning, whether national or international, remains antithetical to the concept of free enterprise. This is well understood by our readers. Moreover, while planning cannot decrease the price of one good without increasing the prices of others, it can be used to increase prices by creating monopolies:

The dangerous fact is that while government is hampered in endeavors to make a commodity cheaper by intervention, it certainly has the power to make it more expensive. Governments have the power to create monopolies; they can force the consumers to pay monopoly prices; and they use this power lavishly. Nothing more disastrous could happen in the field of international economic relations than the realization of such plans. It would divide the nations into two groups — the exploiting and the exploited; those restricting output and charging monopoly prices, and those forced to pay monopoly prices. It would engender insoluble conflicts of interests and inevitably result in new wars.

This is a foreseeable scenario in the context of international agreements dealing with environmental issues. An example of what lies in store can be found in what has been called the “Renewable Energy Explosion” in Spain. After expanding subsidies for the production of renewable energy from 2004 to 2007, Spain was forced to eliminate these incentives in the wake of the financial crisis, leading to a substantial increase in energy costs and severe losses to previously subsidized enterprises.

Mises also identifies the no true Scotsman fallacy, which is invariably used to justify further planning after the initial plan fails:

[…] some of these schemes worked only for a short time and then collapsed, while many did not work at all. But this, according to the planners, was due to faults in technical execution. It is the essence of all their projects for postwar economic planning that they will so improve the methods applied as to make them succeed in the future.

Do Free Trade Agreements Promote Free Trade?

Mises was very skeptical of the outcomes of post-war foreign trade agreements, arguing that ‘the ultimate goal of every nation’s foreign-trade policy today is to prevent all imports’, and that “an international body for foreign-trade planning would be an assembly of the delegates of governments attached to the ideas of hyper-protectionism.”

It might be safe to say that Mises was too pessimistic on this subject. Arrangements between developed and developing nations after the second World War have substantially increased cross-border trade and and reduced protectionism. The trend was further strengthened in the 1990s after the collapse of the Soviet Union and the adoption by erstwhile Soviet Republics of more liberal approaches to foreign trade.

It is not clear, however, that this expansion can be attributed to the conclusion of international trade and investment agreements, and the question remains the subject of much debate.2 In any case, Mises correctly identifies the state’s ability to circumvent restrictions on protectionist policies by taking recourse to other forms of interventionism:

If pressure or violence is applied in order to force Atlantis to change its import regulations so that greater quantities of cloth can be imported, it will take recourse to other methods of interventionism. Under a regime of government interference with business a government has innumerable means at hand to penalize imports. They may be less easy to handle but they can be made no less efficacious than tariffs, quotas, or the total prohibition of imports.

International investor-state tribunals, constituted on the basis of international investment agreements, have successfully dealt with these forms of intervention since the 1990s, particularly by applying international law concepts of indirect expropriation and fair and equitable treatment.

These decisions, may, however, be regarded as unexpected developments, and have caused a significant backlash by states against the very concept of investor-state dispute settlement. For instance, in January 2019, 22 member states of the European Union undertook to terminate all intra-EU bilateral agreements providing for investor-state arbitration.

These decisions have also lead to the adoption by states of new treaties containing wider exceptions for economic regulation. India, for instance, announced in 2016 that it was terminating 58 of its 83 bilateral investment treaties, after publishing a new, more stringent draft treaty for future negotiations. In a striking illustration of the “planning mentality,” the draft treaty provides, inter alia, that:

Investors and their Investments shall strive, through their management policies and practices, to contribute to the development objectives of the Host State.

The Gold Standard, the Cantillon Effect, and “World Money”

It is interesting to note that just a few decades after the end of the belle époque, the “undesirability” of stable foreign exchange rates seems to have evolved into gospel truth for the governments of the 1940s. After observing that ‘the Keynesian school passionately advocates instability of foreign exchange rates’, Mises finds that “stability of foreign exchange rates was in [governments’] eyes a mischief, not a blessing.”

While the various excuses that lead to the abandonment of the gold standard are familiar to our readers, it may be noted that in the international context, protectionism provides another excuse for states:

The various governments went off the gold standard because they were eager to make domestic prices and wages rise above the world market level, and because they wanted to stimulate exports and to hinder imports.

Mises notes that any return to the gold standard would not require elaborate international agreements or international planning. All that would be required is “the abandonment of an easy money policy and of the endeavors to combat imports by devaluation.” Evidently, it is not necessary that the state re-establish the gold parity that previously existed:3

[…] every government is free to stabilize the existing exchange ratio between its national currency unit and gold, and to keep this ratio stable. If there is no further credit expansion and no further inflation, the mechanism of the gold standard or of the gold exchange standard will work again.

Finally, Mises dismisses the idea of an international fiat currency, issued by an international monetary authority acting as the lender of last resort. After dealing with what is commonly known today as the “Cantillon effect,” Mises explains that nations could never agree upon the basis of distribution of this new form of central bank money:

The more fateful results of inflation derive from the fact that the rise in prices and wages which it causes occurs at different times and in different measure for various kinds of commodities and labor. Some classes of prices and wages rise more quickly and to a higher level than others. While inflation is under way, some people enjoy the benefit of higher prices on the goods and services they sell, while the prices of goods and services they buy have not yet risen at all or not to the same extent […]

Under a system of world inflation or world credit expansion every nation will be eager to belong to the class of gainers and not to that of the losers. It will ask for as much as possible of the additional quantity of paper money or credit for its own country. As no method could eliminate the inequalities mentioned above, and as no just principle for the distribution could be found, antagonisms would originate for which there would be no satisfactory solution.

Could these observations give us some clues regarding the future prospects of the IMF’s SDR scheme?

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